SUMMARY: The wins and the losses of superannuation in 2018 – plenty to celebrate, but some land mines to watch out for.

“Big bang” changes were thankfully off-the-radar, but DIY super trustees had plenty to keep their eyes on in 2018.

On the investment front, in an increasingly erratic world where international politics played havoc with share markets, trustees will have been happy just to break even on their investment duties.

It was far more work to keep up with the legislative changes that both came into force and were announced during 2018. And trying to determine whether you could make the most of them.

The major legislated changes were largely wins for trustees and super members of most ages. But it wasn’t all one-way traffic.

The Wins

The biggest win for super members in 2018 is actually a bit of a slow burn, that has at least begun.

The introduction of the five-year catch-up provisions will allow members to put in more than the $25,000, if they didn’t use their full $25,000 in previous years.

It only started on 1 July, 2018, so it won’t be until next financial year (FY20) that people will first be able to make contributions to play catch-up for previous years.

The provisions won’t be fully operational until FY23, when you will potentially be able to make contributions to cover unused concessional contribution caps for FY19, 20, 21 and 22.

Important note: You can only use the catch-up rules if you have less than $500,000 in your total super balance (TSB).

The new downsizer contribution rules will allow the over-65s who are selling a home to put in up to $300,000 into superannuation. If it’s a couple selling the home, that’s up to $600,000.

This opportunity came into force on 1 July, 2018. And there are plenty of qualification rules around it.

The main ones include that you need to be older than 65, that you have lived in the house for at least 10 years and that the sale occurred after 1 July 2018.

You also can’t contribute more than the value of your home – that is, if you sold a jointly owned home for $500,000, you would limited to making $500,000 of contributions between the two of you.

You can only do it once. It must be within 90 days of receiving the funds. And there are other qualification criteria.

While the dropping of the 10% rule started on 1 July, 2017, it wasn’t until earlier this year that the first major opportunity came for people to use it.

Previously, if you earned more than 10% of your income from being an employee, you were limited to making super contributions via salary sacrifice via that employer. But the dropping of the 10% rule meant that anyone eligible to make a contribution now could, and could claim a tax deduction for doing so.

This meant that towards the end of the FY18 year, in May and June this year, employees could, for the first time, decide to put money into your own super fund and claim a tax deduction for it.

For example, if you earned $100,000 a year, your employer would normally put in $9500 a year as part of the Superannuation Guarantee Contribution (SGC) into your fund. But you could now get to mid-June and decide that you wanted to maximise you super contributions by putting up to $15,500 into your super fund.

Note: These deductible contributions form part of your concessional contributions, which are limited to $25,000 a year and include any SGC payments.

The First Home Super Saver Scheme similarly comes with a lot of rules, but is way ahead of its predecessors on usability, even if it’s not quite as generous.

It is designed to allow first home buyers to save tax-effectively for the purchase of a home, using contributions and earnings from their superannuation fund from extra contributions they have made.

The scheme started in July 2017, but July 2018 was the first time that members could seek to withdraw contributed funds to help pay for a home.

Again, this one is a slow-burn. You can only put in a maximum of $15,000 a year and can only take out a maximum of $30,000 for the purchase. It will take a few years before those eligible will have contributed enough money to make this worthwhile.

And, be warned, not all super funds will release money under the FHSSS. Check before you consider making extra contributions.

Spouse super splitting rules continued to rise in prominence this year, for any couple where it’s likely, or possible, that one member might go above the Transfer Balance Cap (TBC), which is currently $1.6 million.

These rules allow a spouse to transfer up to 85% of the concessional contributions they have made the previous year across to their spouse’s super fund account. If one spouse is making the full $25,000 of CCs available each year, then they could transfer up to $21,250 across to their spouse’s account.

Done over many years, this is potentially a powerful way to help slow the growth of the higher earner’s super fund, to try to minimise the chances of going over the $1.6m TBC.

Any couples with even reasonable super balances, but particularly those who believe one of them is likely to bust the $1.6m TBC, needs to start seeking advice in this area to save, potentially, tens of thousands of dollars in tax in retirement.

SMSFs will be allowed to have up to six members in the future. Similarly, the government intends to allow those SMSFs with a good record of compliance to only have to have their funds audited every three years. Both of these measures were announced in the May 2018 Federal Budget, but have not yet been legislated.

The Losses

There were a few issues to deal with.

For those with more than $1 million in a super pension, the new Transfer Balance Account Reporting rules came into force.

That is, if you are going to make a decision to take out more than the minimum pension, and you are going to take that as a commutation, then the ATO wants to know about it, essentially in real time, so the rules can’t be fiddled with. For more information, see this column (13/9/18).

As banks came under pressure at the Royal Commission, one action they took to make themselves smaller targets. They did this in a number of ways, including selling off their insurance arms.

But they also did it by pulling out of the lending market for SMSFs, under what is known as limited recourse borrowing arrangements (LRBAs). While the ANZ had never entered the space, CBA, NAB and Westpac, and all of their subsidiaries, all pulled out and AMP followed.

There are, however, still plenty of smaller, more nimble, borrowers in this space. Despite what some commentators are suggesting, it is still entirely possible to buy a property in your SMSF via an LRBA.

On the investment front, with just a few weeks to go, almost all asset classes are sitting within hand-holding distance of a 0 per cent return for the calendar year. That is, all major investment sectors were, roughly, break even for the year to the end of November.

Using index fund Vanguard as the barometer, Australian shares were slightly negative (-2.92%) including dividends, international shares were slightly positive (+0.87%), while Australian and international property were +1.28% and +3.04% respectively.

Australian fixed interest was around +2.89% and international fixed interest was at +0.98%.

Eke-ing out much of a positive investment result in calendar 2018 would have been difficult. Even more so if you owned direct investment property, with the way that residential property was heading in Sydney and Melbourne in the last 12 months.

There will have been winners. Consider yourself one of those if you managed to finish the calendar year to 30 November more than, say, up 3%.

And then there’s 2019. There are a few landmines on the horizon for then. But I’ll come back to those in my first column in the new year.

*****

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

I understand it can be a little hard to focus on long-term superannuation savings in December.

Half of Australians actually spend first, pay later, with the Christmas credit card not paid off until February or March.

Today I’m talking to the other half. The half that saves for Christmas and pays for it beforehand. From a financial perspective, Christmas is just about done for them.

That half is almost ready for January. And with the added downtime, it’s a great time of year to start planning. (Consider this column the seed to plant for January.)

For anyone within a decade of retirement, super planning is critical. And a big part of that strategy is about maximising your super contributions.

The difference between using that decade wisely and not, can be the difference of many tens of thousands of dollars in retirement. And that, for many, is the difference between a mediocre retirement and a fairly reasonable one.

So, what do you need to be thinking about when the new year ticks over?

Concessional contributions

Concessional contributions (CCs) are the epicentre of superannuation planning. This is how most people get most of their money into super.

For most employees, a good portion of it happens automatically. Currently, a minimum of 9.5% of your salary is paid into a super fund and, hopefully, automatically invested for you.

CCs are taxed “lightly”. That is, they are only taxed at a maximum of 15% on the way into the fund. This compares with marginal tax rates on earned income of up to 47%, for those who earn more than $180,000 a year.

(Those with incomes of lower than $37,000, whose marginal tax rate is generally no more than 21%, will generally be eligible for the low income superannuation tax offset – LISTO – which sees up to $500 paid into their superannuation account, to effectively mean no contributions tax has been paid.)

Because of the light tax treatment, there is a strict limit to how much you can put into your super as concessional contributions. This limit is $25,000 a year.

For the average worker earning $80,000, your employer will put in $7600 a year into your super fund.

That means that of your $25,000 CC limit, $7600 has been used up by your employer via the Superannuation Guarantee (SG). You still have ability to put in $17,400 more, tax concessionally, into super. Read on for details.

Why does the government tax super “lightly”?

For two reasons.

The first is to encourage people to save for their retirement. If you put away for your future into super, you’ll pay less tax than if you take it and spend it now. For someone on a marginal tax rate of 39% (those earning between $87,000 and $180,000), taking their last $10,000 of income would leave them with $6100 if they took it in the hand, or $8500 if they put it into super. That’s an extra $2400 that goes towards your retirement (see how to do that in the next section).

Secondly, so that it pays less tax on what it earns inside the fund, so there is more for your retirement.

Using the same salary as an example, if you earn $10,000 in income from investments outside of super, you would lose $3900 in tax (leaving $6100), but if you earned $10,000 in super, it would only lose $1500 in tax (leaving $8500 in your super fund).

Getting extra into super

Your employer’s contributions aren’t the only way you can get money into super.

You can put extra money in via the conventional way (salary sacrifice), or you can do it the “new” way (personal deductible contributions).

Salary sacrifice is, essentially, a three-way agreement, between you, your employer and the tax office. You tell your employer that you will sacrifice part of your salary into super (before you’ve earned it) and your employer puts it straight into super, where it is then taxed at 15%, not your marginal tax rate.

For employees, the second way – which has only been available since 1 July 2017 – is to put money straight into your super fund, then claim a tax deduction for it.

Let’s say you want to put in $10,000 into your super fund from your savings, on which you’ve already paid tax. If you put in that amount, it will be taxed at 15% by the fund ($1500), leaving you with $8500 in the fund.

But you get to claim a tax deduction for $10,000. If your marginal tax rate is 39% (those earning between $87,000 and $180,000), you will get a tax deduction for that $10,000, meaning you will get a tax return of $3900. For a net cost of $6100 ($10,000 minus $3900), you have got $8500 into super ($10,000 minus $1500).

It works out to be the same as if you had salary sacrificed the money into super. However, you can do it at any time of year, including in the days leading up to the end of financial year. (But you need to be sure the fund receives it by 30 June. That is, given bank transfers don’t always happen automatically, make sure you do it several days ahead of time.)

Those who are self-employed have it slightly differently. If you are truly self-employed, then you make personal deductible contributions, as you do not have an income on which you can pay the Superannuation Guarante (SG).

Why is this so important for 50 to 55 year olds?

It can be harder, when you’re 40, to make the “sacrifice” of putting extra money into super when you know you won’t be able to touch it for 20 or 25 years.

But anyone within 5-10 years of their retirement is within reach of getting access to their super. You’re so close you can almost touch it.

Maximising your CCs in the lead up to retirement is a no-brainer for those who do have some savings/investments outside of super. You are generally going to be far better to run those savings/investments down to take advantage of the tax savings from contributing to super, than paying full tax on it.

Once you turn 65, you have full access to your super. If you change jobs after turning 60, you can also apply to have full access to your super. (Both are known as meeting a “condition of release”, which turns your super into unrestricted non-preserved, giving you full access).

To repeat it … if you know that you will save $2400 a year in tax (for someone on a marginal tax rate of 39%) on $10,000 foregone to super, why wouldn’t you do it in the 5-10 years to retirement, particularly if you have other savings?

If you’ve got 10 years, there’s $24,000, plus whatever it earns, for a start. And many people can make concessional contributions of more than that.

Your individual circumstances

Concessional contributions are the power tool of superannuation.

Maximise them. Particularly in the last 5-10 years to retirement.

But importantly, if today’s column has turned on a light for you, get advice. Concessional contributions are just the start of how a properly orchestrated super plan can help to add tens, perhaps hundreds, of thousands of dollars to your superannuation pie.

*****

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

SUMMARY: Women’s access to super in tough times – divorce and domestic violence – should be improved under new recommendations.

A better superannuation deal for women is on the cards, with the government considering several changes regarding divorce and domestic violence.

Domestic violence victims could be added to grounds to receive early access to super, while the ATO will be able to given powers to share the true value of super balances in divorce proceedings.

The tax office will receive $3.3 milion to develop an electronic information-sharing platform to ensure family court participants have better visibility over super balances.

It has long been complained that in family court matters, some parties (men predominantly) have not fully disclosed, or have been uncooperative, when it comes to tabling full superannuation balances, along with other assets.

This has added significant time and stress to family court procedures, with parties often going on “fishing expeditions using subpoenas and other formal court processes, with no guarantee of success” according to Minister for Women Kelly O’Dwyer.

“Parties to family law proceedings are legally required to disclose all of their assets to the court, including superannuation, however, in practice, parties may forget, or deliberately withhold, information about their superannuation assets.”

Mrs O’Dwyer said the non-disclosure often disproportionately disadvantages women because of the considerable imbalance between male and female super balances.

On domestic violence, the government is looking to allow victims to potentially access up to $10,000 of their super over a two-year period as part of a revamp of the early access rules.

Access to super in Australia is restricted to those who have met a condition of release. While for most this is death, turning 65, attaining preservation age, or hitting 60 and changing employers, there are nine other less-used categories.

These include temporary incapacity, permanent incapacity and terminal medical conditions where the member is likely to die within two years.

But it also includes early access to superannuation for Australians going through tough times, under two main circumstances.

They are known as “severe financial hardship” and “compassionate grounds”.

The former is predominantly for those who have been on Centrelink payments for at least 26 weeks, where they are unable to meet living expenses.

Compassionate grounds allow members to dip into their super for medical treatment, to make loan repayments where foreclosure is a risk and to modify the home for disabled members or dependants. It can also be used to meet palliative care needs for the member, or for a dependant’s palliative care needs or funerals.

The government has proposed a new category relating to family and domestic violence be added to “compassionate grounds”.

Evidence would be required in the forms of either a court order regarding the violence, or two other pieces of evidence, such as reports or statutory declarations from professionals including police, doctors or psychologists.

There was considerable discussion in the government’s consultation groups around what super accessed under domestic violence provisions could be used for. But the government hasn’t proposed to place limits in this area.

The domestic violence recommendations were part of a broader package of 13 reforms being considered for those seeking early release of their superannuation.

The other recommended changes include making the ATO a one-stop shop for all applications for early release under both severe financial hardship and compassionate grounds, the latter of which they took over this year.

Among the remaining proposals, one extension to the rules was to include extending medical treatment conditions of release to cover dental treatment.

The remaining proposals were largely to tighten or restrict access where definitions were unsatisfactory, or where abuse of the system had crept in.

The eligibility under mental health grounds would be tightened to “treat a diagnosed mental illness or behavioural disorder”, removing “mental disturbance”, which doctors said was too vague.

Though the report didn’t say it specifically, too many Australians were accessing their superannuation to have medical treatment (often cosmetic procedures) overseas, while enjoying a bit of a holiday for themselves and a friend.

As a result, release on medical treatment grounds for overseas treatment will only be available for life-threatening conditions.

The government is also going to make sure that under medical treatment options, that two physicians must certify that the treatment is reasonable under the circumstances. Further, one must be a specialist in the particular field of illness or injury and the other must be their regular doctor.

The government is also recommending that regulators give information to members on alternative avenues of support, to try to make early access to superannuation as a “last resort”.

Those wanting early access for housing (ie, meeting mortgage repayments) are going to face tighter restrictions, including only being able to receive access every two years, while their lenders are going to have to agree that the member will be able to service the loan once the arrears have been rectified.

For those with severe disability, the definitions will be expanded to allow them to access superannuation to buy disability aids and specially modified vehicles.

When it comes to accessing super under “severe financial hardship” provisions, members have always had to show that they were in receipt of Centrelink support for the previous 26 weeks. It has been recommended that this be changed to at least 26 weeks out of a 40 week period.

The closing date for submissions is 15 February 2019.

*****

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

]]>http://brucebrammallfinancial.com.au/blog/super-access-rules-may-broaden/feed/0Here’s hoping you get a tax billhttp://brucebrammallfinancial.com.au/blog/heres-hoping-you-get-a-tax-bill/
http://brucebrammallfinancial.com.au/blog/heres-hoping-you-get-a-tax-bill/#commentsSun, 25 Nov 2018 22:59:11 +0000http://brucebrammallfinancial.com.au/blog/?p=5259Read More Here’s hoping you get a tax bill ]]>Bruce Brammall, The West Australian, 26 November, 2018

If you’ve got a big investment property decision to make heading into retirement, I hope you’ve got a huge tax bill coming.

I’m not being nasty! It’s certainly way better than the alternative.

What you don’t want heading into retirement is to be sitting on a capital loss after having owned the property for 10 years. Or worse, the property is worth less than the outstanding loans – that’s potentially a pushing-back-retirement-for-five-years disaster.

So, I hope you have a tax liability awaiting. You’re sitting on reasonable gains, maybe even a property that’s positively geared.

If you’ve got a “good” problem, there are four things you should be considering: whether to sell it; when to sell it; how to minimise tax; and what to do with the released equity.

Firstly, I must state my preferred holding period for property matches Warren Buffett’s when he’s investing: “Our favourite holding period is forever.”

I wouldn’t sell property without a really good reason. There are two main reasons for this.

The first is that the cost of buying and selling property in Australia is ridiculous. Depending on which State the property is located, stamp duty will cost up to 5.5 per cent. The cost of real estate agents and marketing costs to sell the property is, give or take, 3 per cent. You’re looking at between 6-9 per cent to buy and sell a property.

The second is that if you never sell a property, you never have to pay capital gains tax. If it creates sufficient income for you, you can hold it until you die and leave CGT problems for your heirs. (And they only pay CGT if they sell it.)

So, first question, do you sell or not?

There are many potential factors at play here. The main one is likely to be whether the income produced by the property (or properties) is enough to live on, along with your other income. If you’ve done your sums and it is, do you really want to sell?

If it’s not, you might need to sell to release some of that equity to spend. This is pretty common.

Second question, when to sell it. Before or after retirement?

If you sell while you’re still earning a reasonable income, then you’re likely to pay more capital gains tax than if you sell after retirement.

This is because a capital gain (or 50 per cent of the gain, if you’ve owned it for longer than a year) gets added to your other income before you pay tax.

Therefore, if you sell in a year where you’ve earned $80,000 (or more), you’re going to pay a lot more CGT than just after you’ve retired and you’re earning nothing.

Third, how do you minimise tax?

The first part I’ve just answered – by considering selling it before or after retirement. However, you’ll probably need good advice regarding your own situation on this, particularly if you own the property jointly with your partner.

Another good way of reducing the tax bill? Making concessional contributions (CCs) to super.

If you’re under 65, or have met the “work test”, then you might be able to make a contribution of up to $25,000, which could shave up to $8000 off your tax bill. But remember CCs also include any contributions made by your employer via the Superannuation Guarantee.

And, finally, what do you do with the released funds?

This is where you’ll really need to seek the advice of a good financial adviser. Whether you put it into super, or invest it outside of super, will depend considerably on where your existing assets are and how much equity you’re releasing from the sale of your property assets.

If you’re able to make non-concessional contributions to super, and able to use the three-year pull-forward rules, you might be able to get up to $300,000 into super (or up to $600,000 for a couple) where, eventually, the money will generate tax-free income for you.

So, if this is a position facing you, I hope you’ve got a good tax problem. And if you do, for your sake, get some quality advice. It will be worth thousands, probably tens of thousands, to you.

SUMMARY: New survey aims to bust a few myths about running SMSFs, and shows how much work is really involved.

DIY super fund trustees are spending more than eight hours a month running their retirement savings, a new survey shows.

About two hours a week is what trustees say they need to keep on top of the fund – covering administration, performance monitoring, investment selection and staying up to date with regulations.

The finding was part of a survey conducted to launch 2018 SMSF Week – sponsored by the SMSF Association – to inform and educate the 1.1 million current trustees and those considering starting their own fund.

The SMSFA surveyed 2315 trustees to try to bust a few myths of DIY super. And while the five chosen might be well understood as being myths by readers, some of the facts and figures to back them are fresh and interesting.

Myth #1: Are SMSFs suitable for everyone?

No. We know that.

The top three reasons they aren’t are:

having sufficient time to do it properly

a large enough superannuation balance to get started and

the financial knowledge to take control.

Regarding time, the average SMSF member spends more than eight hours a month doing the work of trustee. That’s an extra, full, work day a month (though many are obviously in retirement).

That’s made up of 1.7 hours of administration and paperwork, 2.3 hours of ongoing monitoring and reporting, 3.3 hours of selecting and researching investments and 1.1 hours of keeping updated with legislative regulations.

What do trustees find the hardest thing about running a SMSF? Keeping track of changes in rules are regulations tops the list, with 27% of trustees citing this.

It is followed by choosing investments (26%), the impact of regulatory changes (21%), paperwork and administration (18%), and understanding changes to rules and regulations (8%).

The average age of members when SMSFs are started has been falling, along with the average balance at the time of opening.
Between 2006 and 2010, the average had reach 53 years of age, with a balance of $580,000. In 2011-2014, this had fallen to 52 and $470,000, but between 2015 and 2018, this had now dropped to an average age of 48 and a balance of $400,000.

Myth #2: Do SMSFs need $1 million to be cost effective?

The most commonly quoted recommended figure for a minimum balance for a SMSF is $200,000. The Productivity Commission has released two reports this year that push the case that this amount should be $1 million.

The SMSFA argues the PC’s reasoning for a $1 million minimum is wrong and based largely on data comparisons that are completely inappropriate.

The SMSFA says the PC’s report looks at tax and set-up costs for APRA-regulated funds and SMSFs in a ways that cannot be compared.

And SMSFs have a significant proportion of members in pension phase, which distorts comparisons. SMSFs in pension phase tend to have greater balances, but also take less risks and hold more cash and income-generating investments.

Previous research has suggested that accountants believe the minimum balance should be $240,000 and financial advisers think it should be $310,000. The average SMSF balance at start up, according to the survey, is $430,000.

But it is still about control. Of the survey respondents, more than 50% stated investment control was a key reason, followed by wanting to choose specific investments (32%), advice from an accountant (29%), to achieve better returns (28%), saw what existing funds were charging (27%) and because they were more tax effective (20%).

No-one involved with SMSFs is in favor of Labor’s policy to ditch the returning of excess franking credits. But here are some statistics that show exactly how heavily it is likely to impact SMSFs.

The survey noted that around 47% of SMSFs are in retirement phase, or around 267,000 funds.

And more than 60% of members are aged over 55, which the survey said suggested there are 677,000 members who will be immediately affected, or affected in the 10-15 years of entering retirement phase.

About 245,000 members have incomes of less than $58,000, suggesting the use of franking credits could be a significant source of their income. Analysis of ATO data from 2014-15 for the survey said the average benefit paid by SMSFs is about $50,000, while the average tax return is $5500.

It will hit those in retirement harder. Older SMSF members tend to have higher allocations to listed Australian shares and lower contributions to soak up the franking credits that aren’t going to be returned, if unused.

It’s an issue that will be worse for SMSFs with higher holdings of Australian shares. On that front, retirees (those over 65) have around 40% of their assets in Australian shares, compared with about 38% (aged 55-64) and 25% (those under 55).

Myth #4: How can I be sure my SMSF is appropriately diversified?

Around 82% of SMSF trustees think that it is important that their fund is diversified, but half say they face barriers to achieving diversification.

The largest “barriers” include that it is not a goal for their fund (which will include high-conviction investors) at 12%, a lack of funds (11%), that it creates poor returns (9%) and that it’s difficult to access investments with overseas exposure (8%).

On that last point … I call rubbish. A base level of international exposure can be achieved via ETFs (such as Vanguard).

But it’s also concerning that so many funds believe diversification is achieved by holding shares in 20 or 30 Australian companies. No, that gives you diversification across one asset class – Australian shares.

Diversification should be across asset classes also, with appropriate amounts of money being invested across cash, fixed interest, property and shares.

This has been improving. The number of funds that are invested in one asset – whether that’s shares, property, cash, or fixed interest – has dropped considerably, from around 60% in 2016 to around 50% in 2018.

Myth #5: Does having an SMSF mean I have to go it alone?

It can be confusing for those considering starting a SMSF, or who have recently started one.

Many who are entering SMSF-land are doing so because they want to do it themselves. But for most, that would be crazy. Do you really know enough about tax and audit, along with what you need to know about investment, the law and administration?

And would doing it all be risking costly stuff-ups, if you don’t know what you’re doing?

About 20% of SMSFs sought no professional assistance. Of the remaining 80%, the top professionals used included accountants for tax advice (47%), financial planners (26%), auditors (22%), stockbrokers (13%), accountants for investment advice (13%) and SMSF administrators (13%).

The average number of professionals used was two.

For those who didn’t use professionals, or didn’t use more professionals, the main reasons were high cost (45%), lack of trust (42%) and inconvenience (27%).

*****

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

SUMMARY: The winds of change might be sweeping through, but geared DIY super property investment is not dead. So many misconceptions.

Property markets are in falling in some major cities. And conditions in the lending market mean it is harder to get funding.

Both of which are posing some challenges for DIY super funds looking to borrow to invest.

But there appears to be some serious misconceptions about the ability of self-managed super funds to borrow to buy property at the moment.

Don’t misunderstand what has been written recently, including my article a few weeks ago. Limited recourse borrowing arrangements (LRBAS) are NOT dead. Not by any stretch.

As I often make clear, debt-assisted property purchases inside a super fund are not for everyone. There are plenty of people who want to do them who simply shouldn’t (and the queues for these often start at a property developer’s office).

But that doesn’t mean they’re for no-one, or that they aren’t possible any longer.

Today, I’m going to go through some of those misconceptions.

Banks have shut down LRBAS

No, they haven’t. True, many of Australia’s largest lenders have withdrawn from the SMSF LRBA market, but they are not, and never were, the only lenders in this space.

Through to the middle of the year, CBA, NAB and Westpac had all pulled out (including their subsidiaries) from offering property loans to SMSFs. (ANZ had never entered the LRBA market.)

Why? The major banks pulled out for two reasons. The first was capital requirements – they couldn’t get enough of a return from these loans, largely because they had big-bank processes. The second reason was scale. The banks are used to having scale in any business area they move into and this was not big enough to be a core part of their business. The pressure from the Royal Commission on the banks’ misdeeds probably added to their decision to exit.

There are a number of second- and third-tier lenders who are still operating in this space. And many are more nimble and offering more competitive rates than the majors were before they departed.

The sector is alive and well. That doesn’t mean that because lenders are available that you should dive into this space (see below). But it does mean that, where the need is appropriate, there are lenders operating who should be able to make a loan accessible for you to purchase a geared property inside your SMSF.

“LRBA properties need to be positively geared”

Poppycock is the first word that springs to mind.

Negatively geared properties work best, from a tax perspective, when the borrower is an individual on the highest marginal tax rate (MTR), where they are claiming back up to 47% of the negative gearing losses.

But they still work for others, potentially, on lower MTRs.

And that includes SMSFs. Complying SMSFs have a maximum tax rate of 15%. If you have a property that is negatively geared to the tune of $10,000 – with no other tax implications to consider – then it would normally get a 15% tax deduction, or $1500, leaving a net cost of $8500.

If the same super fund had a member making contributions of $25,000, then it would need to pay $3750 in income tax (again ignoring other income generated by the fund).

The advantage of negative gearing on the SMSF LRBA property in this case would be that the negative gearing from the property would mean that the fund would have to pay less tax on the income from the $25,000 concessional contributions (or other income generated by the fund).

Negative gearing – for any purchaser – only works if the capital appreciation from the property is more than making up for the income losses from the holding costs of the property.

That is, if the property is losing (as above) $8500 after tax, then the capital appreciation of the property should be a multiple (of at least 2x or 2.5x) of those income losses. Two things to note. Capital appreciation obviously won’t occur every year. And, with rents rising over time, negatively geared properties will eventually become positively geared.

There is no legal or lending requirement for geared SMSF property purchases to be positively geared.

And making huge negative gearing losses for any investor will rarely make sense. You should properly estimate and consider the holding costs and tax position before you purchase any property and determine whether the holding costs will be outweighed by the likely capital gain.

Debt attached to SMSF property is now out of the question

Rubbish.

It hasn’t been banned by the government (yet). And just because the nation’s largest banks have withdrawn from the market doesn’t mean lenders aren’t offering finance.

It can be done. And there are some reasonable-size names, including Macquarie, Liberty, Bank of Queensland, Bendigo Bank and LaTrobe, are still actively lending in this space. Plus many other smaller lenders.

Sure, further lenders might withdraw from the market. And it might get a little harder for those who are on the cusp to get a loan. But generally strong loan applications – with SMSFs with plenty of servicing capacity – are going to get through.

But is geared property in your SMSF right for you?

This is a truly important question. And the answer for most is probably going to be “probably not”.

My opinion is that for people to consider SMSF geared property, they should have either (a) owned investment property in their own names, or (b) have run a business.

My rules are around understanding the lumpy cashflow nature of property investment (rent not being paid, unexpected costs needing to be met) and being confident to hire and fire the paid help.

And I’d love to see property developers banned from selling their wares to SMSFs. Which means I don’t want to see any SMSFs buying property from developers.

Property investment will be right for many SMSF members. Many might want to buy it outright with cash. But many others will see good reason to borrow inside the super fund via an LRBA.

*****

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

A couple of times a year, we all face some big choices about how to blow some “spare” time. One of mine happened in recent days.

My choice was around spending hours boning up on planning laws to try to determine whether a neighbour’s knockdown and rebuild of their home fitted into local planning guidelines and whether or not to lodge a complaint.

We’ve renovated in recent years, but what I know about planning laws could be fit comfortably inside a mosquito bite. Effectively starting from scratch. Countless hours of research, then application to plans (that are also like a foreign language to me).

I could pay a professional for a few hours of their time to do the job properly. Take away my stress and worry. Spend more time with the kids.

Or I could ignore it. Repress it, push it back. And just hope that I don’t wake up in a year to a three-storey monstrosity next door.

I chose professional advice. I’ve got work to do, kids sport to watch and other stresses in my life that, simply, I can’t pay others to take off my hands. (No, not even Airtasker.)

And the fee of less than $1000 is an investment in my house not permanently falling by 10-20 per cent because of an eyesore next door.

For most people, there’s a time in every week where your mind flicks on to your personal financial situation. Stress. Worry. You know you should be doing more. Or at least something. But you push it into the back of your mind, like a repressed memory. (Don’t worry, it will come back again next week.)

Am I investing wisely? Am I investing enough? Can we afford to buy a home? Should we buy an investment property? Is my super invested the way it should be? How do I get safely started into the sharemarket? Or what sort of investments should I be in? What happens if my partner dies? Or I get really sick and can’t work? Are we on track for our retirement? How are we going to afford the kids’ schooling?

Yep, they’re biggies. And they can be consuming.

You have two choices. Well, three actually. They’re always the same three.

First, you too can bone up for dozens/hundreds of hours. Second, you can find a professional who can explain it simply, implement it efficiently and take away the stress.

Or, third, you can repress it and pray Tattslotto will save you from a retirement of baked beans.

If you have a career, have young kids/grandkids, or simply have better things to do than read finance tomes with your limited spare time, then your choice is simple.

The real problem – as you’re reading about from the Royal Commission all year – is finding professionals you can trust to help you.

But, granted, the financial advice industry doesn’t appear all that trustworthy at the moment.

Elements of it probably need a targeted missile strike – to be blown up and started again. Such as banks selling off their insurance units.

Other parts need fine tuning. Laws will be changed to tighten advice standards. Educational requirements are being lifted for new and existing advisers. Conflicts of interest will be further eradicated.

Your job, if you know you don’t have the time to learn enough to do it yourself, is to find a financial adviser you can trust.

It might not be the first one you meet. The right one might come from the recommendation of a friend or family member. Or you might not like those ones. It might come after some time researching on the internet. Or not.

The industry (and mortgage broking too, for that matter) is filled with quality advisers who are making huge differences to their clients’ lives every day. Despite everything hitting the news this year, top-notch advisers are out there in their droves.

People are more likely to be investing wisely, can see their super making progress, have themselves insured properly or are comfortable that they’re covered financially.

SUMMARY: What you need to know and do about your super before you die – super estate planning basics.

Death is never easy for those left behind. And when it comes to superannuation and death benefits, it’s become a whole lot messier in recent times.

The introduction of the $1.6 million transfer balance cap (TBC) will, for many, lead to far more complex considerations when a partner dies, particularly where there are combined superannuation pension balances that exceed the new TBC.

Estate planning is an important part of superannuation that too few people, even self-managed superannuation trustees, understand. And it’s an area where, increasingly, advice needs to be sought.

The basics of superannuation estate planning need to start with the understanding that your superannuation does not automatically become part of your will. It is separate and requires its own planning and instructions.

Non-binding nominations

Superannuation accounts will almost always allow for a non-binding death benefit nomination. This is where the member tells the trustees (of either APRA-regulated funds, or SMSFs) to whom they would like their superannuation money to pass.

Non-binding nominations, however, are left to the discretion of the trustee. The trustee might look further than the nominated beneficiaries to find others who might be entitled to a portion of the superannuation balance.

The most common complications can occur here where there are former partners of the deceased, who might expect to receive some sort of financial benefit. For example, this might include a former partner who was still receiving maintenance from the deceased at the time of death, or estranged children.

In most cases, the trustee will follow the wishes made in the non-binding nomination. But anyone who might have concerns about others having a potential claim on their super might want to investigate a binding death benefit nomination (BDBN, see next).

Non-binding nominations were the original estate planning option and should be offered by all super funds.

Binding death benefit nominations

A step up from a non-binding nomination is a binding death benefit nomination (BDBN).

A properly constructed BDBN takes away the discretion of the trustee. If properly documented, the instructions must be followed by the trustee.

Note: Nominations (both binding and non-binding) still need to be made to those legally eligible to receive a superannuation death benefit, known as dependants. These include spouses, children and those in an inter-dependent relationship with the deceased. It can also be left to the deceased’s legal personal representative (LPR).

Legal Personal Representative

Leaving benefits to your legal personal representative (LPR) is how you can have your superannuation dealt with via your will.

If a non-binding nomination to your LPR is given, the trustees will still have discretion to determine who to pay the funds out to. If a BDBN is used to leave the money to the LPR, then the super fund will not have discretion.

Reversionary Pensions

There are different considerations to be made once a pension has been started by the deceased.

Instructions to create an automatically reversionary pension (ARP) upon death can allow the deceased’s pension to continue on to their dependants.

This allows the money to remain in the tax-friendly superannuation system, rather than being paid out as a death benefit.

The issues that arose out of the changes that came into force on 1 July 2017 are where, potentially, both the deceased and the survivor have pensions and their combined total balances exceed the $1.6 million transfer balance cap (TBC).

Let’s take Rob and Mary. Both have pensions of $1.2 million and both have automatically reversionary pensions in place. Rob dies soon after setting up his pension.

If Rob had an automatically reversionary pension in place, then the pension will revert to Mary. However, this would mean that Mary now has $2.4 million in pensions.

The legislation doesn’t allow for this to continue, but in the event of death where there is a ARP in place, Rob’s pension won’t count against Mary’s Transfer Balance Account (TBA) until 12 months after Rob’s date of death.

Mary now has, essentially, a year to make decisions about what to do with the combined pension accounts she now controls.

Those options include rolling back a portion of her pension ($800,000) to accumulation, so that she can continue to receive Rob’s $1.2 million pension and then have a $400,000 of her own pension, which would keep her under the $1.6 million TBC.

Mary might also wish to take Rob’s pension, or a portion of it, as a death benefit lump sum, which would take it out of the super system.

Rob’s pension balance cannot be turned back to accumulation. It either needs to be paid as an ARP to Mary, or paid out of super as a death benefit.

The ATO has warned that the ability to keep Rob’s pension in the system can only come if there is a ARP in place. If there is any level of discretion left to the trustee, then it is not considered to be an ARP and will have to be paid as a death benefit pension.

Transition to retirement pensions

From 1 July 2017, transition to retirement pensions (TTRs) aren’t considered to be in pension or retirement phase and therefore can’t be converted to reversionary pension. Only account-based pensions (ABPs) can.

This is another reason it is important for members to convert TTRs to ABPs at their earliest opportunity – generally ceasing an employment arrangement after turning age 60.

Getting advice is critical

Generally simple affairs will be able to be neatly dealt with via death benefit nominations. But for anyone with a degreee of complication, including having pensions ore more than $1.6 million in combined pensions for a couple, getting the right advice is critical.

Today, I have only covered the basics of what needs to be considered when it comes to estate planning for your super.

Having money come out of super when it could have stayed and paying out death benefits to the wrong people can lead to horrendous tax consequences for your surviving family.

*****

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

It’s usually a case of progression. Up the scale. But at some point, you need to stop and watch, to see if your method is having an impact. Yes?

Can a baseball bat be an effective communication tool? Well, maybe, if your audience is the mob. Robert De Niro’s version of Al Capone used one to effect in The Untouchables (a piece of cinema burned in my brain).

When it comes to the property market, my fear is that the authorities are now reaching for the baseball bat.

While Perth’s property market was flushed through the S-bend some years ago, property markets on the east coast are now tumbling. Sydney is off 6 per cent and Melbourne 4 per cent in the last year, according to Corelogic.

It’s no accident. Sure, the two big cities had run too far and needed some common sense to prevail. But, equally, APRA and ASIC should take some credit – they’ve been fiddling with the levers to help engineer this for several years.

Since mid-2015, APRA has been constantly badgering the banks to adjust their lending criteria, to reduce borrowings to, particularly, property investors. ASIC’s moves have been progressive. And some haven’t had time to take effect yet.

So, with markets now moving in the preferred direction, surely it’s time to sit and watch?

Apparently not. Time for the baseball bat.

Anyone trying to get loans in the couple of years has found it harder. But we ain’t seen nothing yet.

In the next 12 months, Australians’ ability to get a loan – fundamental to buying a property – will become exponentially tougher.

We’re going to see new regulations from the banks around interest-only loans and debt-to-income ratios, which will have incremental effects.

Applying for an interest-only loan will become harder and, it’s likely, that we’ll see debt-to-income ratios reduced.

Let’s assume the current debt ratio is seven. That is, if the household earns $100,000 a year, then the maximum they will be able to borrow might be $700,000. If banks are forced to drop this to six times, that would reduce maximum borrowings to $600,000.

There are further changes coming around “genuine savings”. Gifts from mum and dad, or inheritances, are going to face tighter controls.

But the biggest one is credit cards. And this is truly scary.

From next year, banks are going to make you “service” the full value of your credit card limit, plus interest, paid in full over three years.

Here’s how this will impact you buying a home.

Let’s say you have a few credit cards with combined limits of $50,000.

Currently, a lender will assess you as needing to be able to afford approximately 2.5 per cent of that balance a month, or $1250. That is, you need the ability to meet repayments of $15,000 a year.

Under the new rules, you’ll need to be able to make repayments of around $1960 a month, or $23,520 a year.

There’s another $8500 a year that will be taken off your ability to service a loan. This will kill chances for thousands.

For many, there will be an easy fix.

Many borrowers have limits far exceeding what they need. They might have credit card limits of $50,000, but really only need $20,000 or less.

They could reduce their limits to $20,000.

But, even if you’re thinking of applying for a loan next year, don’t reduce your credit card limits just yet. You can do this as part of the loan process, where your mortgage broker will be able to tell you exactly what limit you’ll need in order to qualify for the loan.

Property markets on the east coast are doing exactly what everyone thought they needed to do. They’re heading south. And, as time rolls on, it will probably be painful.

So many levers have been pulled already.

Do we really need, Al Capone-like, a baseball bat? Or should they just stop and watch a while?

It’s usually a case of progression. Up the scale. But at some point, you need to stop and watch, to see if your method is having an impact. Yes?

Can a baseball bat be an effective communication tool? Well, maybe, if your audience is the mob. Robert De Niro’s version of Al Capone used one to effect in The Untouchables (a piece of cinema burned in my brain).

When it comes to the property market, my fear is that the authorities are now reaching for the baseball bat.

While Perth’s property market was flushed through the S-bend some years ago, property markets on the east coast are now tumbling. Sydney is off 6 per cent and Melbourne 4 per cent in the last year, according to Corelogic.

It’s no accident. Sure, the two big cities had run too far and needed some common sense to prevail. But, equally, APRA and ASIC should take some credit – they’ve been fiddling with the levers to help engineer this for several years.

Since mid-2015, APRA has been constantly badgering the banks to adjust their lending criteria, to reduce borrowings to, particularly, property investors. ASIC’s moves have been progressive. And some haven’t had time to take effect yet.

So, with markets now moving in the preferred direction, surely it’s time to sit and watch?

Apparently not. Time for the baseball bat.

Anyone trying to get loans in the couple of years has found it harder. But we ain’t seen nothing yet.

In the next 12 months, Australians’ ability to get a loan – fundamental to buying a property – will become exponentially tougher.

We’re going to see new regulations from the banks around interest-only loans and debt-to-income ratios, which will have incremental effects.

Applying for an interest-only loan will become harder and, it’s likely, that we’ll see debt-to-income ratios reduced.

Let’s assume the current debt ratio is seven. That is, if the household earns $100,000 a year, then the maximum they will be able to borrow might be $700,000. If banks are forced to drop this to six times, that would reduce maximum borrowings to $600,000.

There are further changes coming around “genuine savings”. Gifts from mum and dad, or inheritances, are going to face tighter controls.

But the biggest one is credit cards. And this is truly scary.

From next year, banks are going to make you “service” the full value of your credit card limit, plus interest, paid in full over three years.

Here’s how this will impact you buying a home.

Let’s say you have a few credit cards with combined limits of $50,000.

Currently, a lender will assess you as needing to be able to afford approximately 2.5 per cent of that balance a month, or $1250. That is, you need the ability to meet repayments of $15,000 a year.

Under the new rules, you’ll need to be able to make repayments of around $1960 a month, or $23,520 a year.

There’s another $8500 a year that will be taken off your ability to service a loan. This will kill chances for thousands.

For many, there will be an easy fix.

Many borrowers have limits far exceeding what they need. They might have credit card limits of $50,000, but really only need $20,000 or less.

They could reduce their limits to $20,000.

But, even if you’re thinking of applying for a loan next year, don’t reduce your credit card limits just yet. You can do this as part of the loan process, where your mortgage broker will be able to tell you exactly what limit you’ll need in order to qualify for the loan.

Property markets on the east coast are doing exactly what everyone thought they needed to do. They’re heading south. And, as time rolls on, it will probably be painful.

So many levers have been pulled already.

Do we really need, Al Capone-like, a baseball bat? Or should they just stop and watch a while?